Financial market impact on the real economy: An assessment of asymmetries and volatility linkages between the stock market and unemployment rate

Abstract

Using a GARCH-in-mean VAR procedure applied to US data, we find that stock market volatility impacts positively on the unemployment rate. We further identify asymmetries insofar as positive and negative shocks to stock market returns give rise to contrasting responses in unemployment consistent with both short-run complementarity and substitutability between capital and labour. Moreover, the impact from a negative shock is consistent with complementarity. The impact from a positive stock market shock is also consistent with complementarity albeit in the very short-run, whereas evidence consistent with substitutability between capital and labour predominates soon after thereby increasing the unemployment rate.